TWO experts with Northern Trust
Asset Management, Sabrina Bailey,
global head of retirement solutions,
and Mamadou-Abou Sarr, global head
of environmental, social and governance (ESG) investing, recently penned
a helpful analysis examining the
proper role of ESG in defined contribution (DC) retirement plans.

Roughly two years after the Obama
administration moved to open up the
use of ESG investing factors under the
Employee Retirement Income Secu-

AverageAge ofAdvisersTicks Down… But succession plansare still needed

THE financial advisory industry is
getting younger as more firms hire
recent college graduates to fill client-facing and revenue-generating roles,
according to TD Ameritrade Institutional’s latest Financial Adviser
Insights research report.

“People and Pay” reports thatnearly one-third of firms are proac-tively targeting recent college gradu-ates to fill such roles, and, as a result,There is evidence that these grad-uates emerge licensed and creden-tialed, but naturally “they are lessproductive than experienced invest-ment advisers with an existing clientbase,” at least during their early yearsin the firm, the report says.

Vanessa Oligino, director of busi-ness performance solutions at thecompany, suggests that the big chal-lenge for firms interested in recruitinga new generation of advisers is to“communicate the benefits they canoffer, promote the growth prospectsof a financial planning career andstructure an organization that canhelp these new advisers develop andcontribute to long-term growth.”The research shows that themedian firm expects to have sevenfull-time-equivalent employees bythe end of this year, up from five justtwo years ago. And while advisersreport that the pace of client growthhas slipped to 6.4%, “that growth rateis still slightly above average for thenine-year history of the study.

Still, finding qualified advisers to
work with clients is increasingly challenging, as over two-thirds of firms
reported.

“As a result of this scarcity, morefirms are outsourcing, forming stra-tegic partner relationships and castinga wider net for talent,” TD Ameritradenotes. “Indeed, six out of 10 firms haverealized labor savings as a result ofsome form of outsourcing.”Besides outsourcing complianceand back-office functions, many firmsnow use third parties to offer addi-tional services such as tax prepa-ration and insurance, even if theyadvertise these services as clientofferings, TD Ameritrade found. Thestudy also shows that firms are incor-porating a range of benefits and non-cash compensation such as flexiblework schedules.

“A key offering for younger advisers
is a clear career path and the availability of mentoring” from seasoned
professionals, Oligino says.

—John Manganarority Act (ERISA), the pair say they seetremendous interest from definedcontribution plan clients to use ESGto “mitigate risk, seek opportunitiesand offer more options to their partici-pants.” ESG can help a sponsor meet allof these goals, Bailey and Sarr agree,but there are some considerations thatmust be taken into account to ensureESG themes do not conflict with thestrict tenets of ERISA.

“First and foremost, are therestrong organizational values thatshould be reflected in the retirementplan investment menu?” Bailey says.“This is the beginning of defining thepotential role of ESG in a DC plan.Women and Millennials, in particular,are creating demand for investmentsthat align with the corporate values oftheir employers.”Of course, under ERISA, there arelimits on the extent to which plans canconsider social values when pickinginvestments, Sarr advises. Even withthe Obama-era expansion of ESG inDC plans, the sponsor must carefullyconsider the risk-return profile. If aninvestment can reasonably be expectedto underperform because of itscommitment to a certain set of values,it is probably not a good fit for the DCworld. This was more of an issue in thepast because ESG funds were typicallydesigned to simply “screen out” certainstocks—say, alcohol, tobacco or fire-arms companies. Today the productset is far more sophisticated and takesa more positivist approach, leveragingESG analysis to improve decision-making, rather than simply relying onnegative screens.

“ESG analytics and ratings have
improved dramatically over the years,”
Sarr observes. “ESG ratings can now be
used as a risk mitigation technique or
an opportunity-seeking technique.”

The idea is that the highest-rated
companies from the ESG perspective
should stand out against their competitors and should have lower resource-scarcity risk. —John Manganaro